Singapore on Thursday reported a surprise expansion in its economy in the first quarter, helped by a surge in financial services as trading in stocks and foreign exchange soared.

The Southeast Asian city-state, whose economy is heavily dependent on trade, manufacturing and financial services, said gross domestic product expanded 1.8 percent in January-March on a quarter-on-quarter, seasonally adjusted and annualised rate, much better than the advance estimate of a 1.4 percent contraction.

The expansion, which handily beat the forecasts of all economists polled by Reuters, was due to a 50.6 percent quarterly surge in finance and insurance that more than offset a 12.3 percent contraction in manufacturing.

The better-than-expected GDP data, along with a warning that core inflation could pick up in coming months, pushed the Singapore dollar slightly higher against its US counterpart after opening weaker.

Singapore has been grappling with slow growth and relatively high inflation in recent years amid weakness in key export markets as well as tighter local restrictions on foreign workers that have raised costs and made it harder for successful firms to expand.

Chua Hak Bin, Southeast Asia economist at Bank of America Merrill Lynch, said the labour restrictions have hit Singapore manufacturers a lot harder and there is a de-coupling between manufacturing and services.

"Singapore's weakness has been overstated because a lot of data that people look at is manufacturing-related... But loan growth bottomed in the fourth quarter of last year and trading activity is up, driven by the surge in global liquidity," he said.

Singapore's Ministry of Trade and Industry on Thursday reiterated its growth forecast of 1-3 percent for 2013 and said it expects the economy to improve gradually over the course of the year.

Manufacturing accounts for about 20 percent of GDP while financial services contribute around 12 percent.

Ong Chong Tee, deputy managing director at the Monetary Authority of Singapore, the city-state's central bank, said during a media briefing that the "risk on" environment boosted trading in stocks and foreign exchange during the first quarter.

"Market sentiment is positive and should therefore hold up the sector in the near term... A lot will depend on global markets," he said, when asked if the financial sector rebound was sustainable.

Investment banking and wealth management also performed better during the quarter, he added.

Ong also said that core inflation in Singapore is likely to edge up towards 2 percent, even as headline inflation eases because of a drop in car prices.

Core inflation, which excludes car prices and housing rents which are more affected by government policies, rose 1.6 percent during the first three months of the year.

Singapore will report inflation and industrial product data for April later on Thursday.

MAS said on April 30 that headline inflation could average below 3 percent for the rest of 2013, easing to levels last seen three years ago as the recent fall in oil prices and government measures to rein in car prices take effect.